Star Trek comes out this week... I thought this was appropriate.

Ok so people wanted my 5 point plan on how to fix the economy, so here it is.  It is grossly simplified but the general principle is totally relevant and effective.  I guess I should start by saying that no one man can ‘fix’ the economy or no ‘party’ or government can fix the economy… the economy will be fixed by individuals in a free market with the liberty to do so, the only thing that the government can really do is get out of the way, uphold civil liberties and protect against fraud.  Ok, onto the plan:

1)  Let companies fail.

Many companies are over-leveraged and unable to clear their balance sheets to go afloat… they should be allowed to go bankrupt.  Yes people will be unemployed.. unemployment will rise to 20%+, but this will be a temporarily disposition rather than an enduring 10 year reality like the Great Depression (where the government interfered horrendously with the economy).

One argument against this is that the financial systems would collapse if this occurred, due the securitized debt problem (hundreds of trillions of dollars).  The short answer to this is: sure lots of companies and over-leveraged institutions would fail and there would be a ripple effect.  However, individuals and businesses who built solid companies and protected the value of their wealth will be at the forefront of rebuilding the nation’s economy.   Not all of the banks are broke under capitalized and these will emerge as the new major banks in the country.  The financial system has been built on sand, the best way to reestablish a sound one is to let the old one collapse and let the competent people (not the government) rebuild it from a solid foundation… which brings me to point 2.

2)  Eliminate fractional reserve banking, replace with 100% reserve banking with optional debentures.

Fractional reserve banking is the very mechanism of inflation that allows massive asset bubbles to inflate and the crazy credit expansion to occur (i.e. securitized debt wouldn’t have expanded to the levels it has presently reached without fractional reserve banking).  This is more effective than regulation at preventing something like the current crises from happening again.

Optional debentures are like a fixed term deposit, where the money you deposit will be lent out to individuals/businesses.  This essentially means that you can place your money where it will be treated like classical fractional reserve banking… this fulfills a legitimate part of investment in the economy without tying it so intimately to people’s savings.  At the moment if the banks lend out all the money you’ve deposited, and then you show up and ask to withdraw your money, the bank borrows another bank’s money or the Reserve Bank’s money… which is incidentally somebody else’s money or freshly printed money in the case of the central bank.  This is the major tool for inflation and is a hidden tax on the population that people pay through higher prices (let me know if you want a further explanation of exactly how that works).

3)  Reintroduce private coinage.

Classic Hayek proposal that is actually better than reintroducing a gold standard.  This will essentially create a free market and competition in currency where towns, states, private firms or banks can issue their own currency.  These currencies can compete with the national currency, so essentially this breaks the money monopoly held by the government.  Here you can have firms or banks issue 100% backed currency, which will undoubtedly be the currency of choice over the current fiat money.

How this will work is that one day you go to Bank X and give them $1000 Australian dollars.  They use this $1000 to purchase the equivalent amount in gold, say 1 ounce of gold.  Instead of giving you a 1 ounce gold coin, they hold the gold in their vaults and give you paper certificates.  These paper certificates can be exchanged at the bank at a moments notice up to the 1 ounce of gold you purchased.  Alternatively, if you want to buy a suit, you can give these certificates to a suit vendor in exchange for the suit you wish to purchase.  The vendor can then go to the bank and withdraw the 1 ounce of gold.  If however you wish to pay for the suit in Australian dollars, you are free to do so… which is exactly the point, you have freedom to choose your medium of exchange.  Inevitably, there would be a move to use currency backed by precious metals such as gold, silver or platinum… maybe even diamonds.  Why?  Because the medium of exchange, the paper money we all know, is redeemable in a real asset that has real value.  This would be certainly preferable to government printed money which is backed by nothing… at all.

4)  Cut government spending… drastically.

The Federal government should have very few enumerated powers… primarily national defense.  A lot of the money for programs that include welfare, health care, education etc are completely unnecessary and actually make problems a whole lot worse.  I have two views that you must pay attention to before you label me a monster:

a)  A utilitarian argument that shows simply that a government controlled bureaucracy will ultimately be less efficient, more wasteful and poorly managed compared to a number of privately owned firms competing for business (note the key word is competing).

b)  If you really really think that the government should pay for everyone’s health care, education, welfare… fine, make your case to the local State government.  A big over-reaching Federal government will surely make things worse and will tax the people of one State to pay for the health care/*insert government program here* over another State.

I mean even I think that there’s a role for government to pay for people in society who absolutely can’t work through no fault of their own… but I don’t want a Federal government to do this, I’d prefer the State government to take care of it.  Even better I’d prefer the church to go back to it’s roots and take care of the defenseless, but that’s a separate issue altogether.

With spending cuts in the Federal budget, you will be a position to eliminate the income, capital gains, GST etc  Very few taxes would be necessary to fund the necessary responsibilities of a Federal government.

5)  Eliminate the Reserve Bank of Australia

No more centrally planned economy, no more artificial setting of the interest rates.  Interest rates must be based on the proportion of savings to money lent out (this is especially relevant if you do not eliminate Fractional Reserve Banking, but still valid under the optional debenture system).  No more printing of money, not more market operations, no more lender of last resort (if banks don’t have enough capital due to poor management, they go bankrupt) and no more purchasing of government debt with printed money.

Ok that’s my plan…

God bless,

Washo